In General: MTG Economics Part 4: Types of Risk

Hello and welcome back to In General, the segment where I talk about anything and everything relating to Magic: the Gathering. This article is the fourth and final installment of an ongoing series about MTG Finance. If you missed the previous segments, check out the links below.

Part One: The Primary Market Price
Part Two: Secondary Markets
Part Three: Investment Strategy

In this epic conclusion we will be discussing some risks that can hurt your Magic portfolio and make it more difficult to produce consistent returns. Whenever you invest, you need to carefully examine the risks and decide if the potential for gain is worth the potential for loss.

Different Types of Financial Risk

There are many different types of risk and an understanding of all of them will make you a better investor and a more informed human being, but for the purpose of this article I am going to focus on a few specific types of risk that are specifically applicable to investing in MTG.

Political Risk - The political risk is when a government or administration changes their rules, which negatively impacts a business. In the world of Magic, we are really talking about the DCI. If a card becomes banned, the demand for that card will drop sharply, followed immediately by the price. Another example could be Wizards Organized Play choosing to closing support for a particular format. If Legacy were no longer a tournament format, Force of Will would decline in price.

Replacement Risk - If a substitute for your card is created, then some people will inevitably switch to that new card, reducing demand for the card that you own. Imagine if you had invested heavily in Divination, but then Compulsive Research comes out and you feel pretty bad because no one wants to play with Divination anymore.

Reprint Risk - This is pretty straightforward: if a card is reprinted, the supply will increase without demand changing at all. Everything else being equal, the market price of the card will go down. This obviously impacts the return you can expect to get on your investment. Note that there are some important counterexamples such as Tarmogoyf in Modern Masters. Sometimes reprints, like those with new art, will create a collector's market that more highly prizes the original/superior version.

Inflationary Risk - If you are trying to use Magic as an investment to make money, you have to consider the risk of inflation. If you're investment grows at 2% per year, but inflation goes up by 2.5%, then you will consistently lose purchasing power over time even though you are making money on paper (badum chee). When you trade an investment in for a particular type of currency, you open yourself up to all the risks that come along with that currency. Historically, inflation on the U.S. dollar has been about 3%, although currently it is below 2.

All of the above are known as 'Unsystematic Risks'. They are specific to one holding; a single card, single set, etc. When the market value of an asset goes up or down irrespective of the market as a whole, the cause is likely an unsystematic risk.

Systematic Risk - Systematic risk is the risk that affects the entire market. As the player base grows, the demand for cards will grow, appreciating the value of your investment. But if the game isn't selling well, the player base shrinks and demand for your cards will go down. This will adversly affect the price and lower your returns. Think of it this way: if you are the only person left on the planet who is interested in Magic, Black Lotus will have a market value of 0$. Supply hasn't changed, but demand has shrunk to zero.

There are certainly other risks that could affect your investment, but these are the most important in my mind. The next time a card that you are following changes in price, try to think about why that happened. Try to classify those changes; think more objectively about what is going on behind the scenes in the market. Having a solid understanding of the economic factors involved in any market will guarantee better returns over the long hall.

My final word on this subject: nothing in these articles should be considered as a financial recommendation, this series was meant purely for educational purposes. I understand that there is a wealth of good information out there and I encourage our readers to digest as much of it as possible. Do not consider this your one-stop-shop for investment advice. If you have questions feel free to leave them in the comments or reach out to us on social media.

I can conclusively say that this will be my last article about finance for a very long time. Next week we will have something COMPLETELY DIFFERENT!

See you then Zoners.

-GG

In General: MTG Economics Part 3: Investment Strategy

Hello and welcome back to In General, the segment where I talk about anything and everything related to Magic: the Gathering. We are in the midst of a four part saga about using Magic as a financial investment. If you missed the first two segments you can check them out using the links below.

Part One: The Primary Market Price
Part Two: Secondary Markets

In last week's segment we talked about some of the difficulties one encounters when using MTG as a financial asset. Today we are going to look at some of the principles that can help you successfully invest in the game.

Strategies for Financial Growth

It is important to remember that as the game grows, so to does the market for those products, including all manner of merchandise that aren't cards. An investment in a card is likewise an investment in the growth and success of the game at large. You need to think in these terms when you are committing to any investment.

Diversification - You have heard not to put all of your eggs into one basket. If you separate your investments they won't all break at once. If you identify that a card is likely to increase in value, commit to that investment, but don't commit 100% of your portfolio.

Modern Portfolio Theory essentially confirms that you will produce more consistent, positive returns by diversifying across not only different cards, but across different asset classes. Invest some of your money in singles, some in sealed product, and some in limited edition collectibles, original artwork, memorabilia etc.

Timing the Market - Or more accurately: don't try to time the market. You have probably heard the old adage, buy low - sell high. Life isn't always that simple, but it could be...if you stay disciplined. If you have made some good money on an investment, cash out. It doesn't matter if it continues to increase or not, you made money and consistent returns will keep in you in business. If you are unsure about where prices are headed, it is best to 'close your position' (sell for cash) and lock in that gain.

Also, don't buy anything while prices are volatile. The best times to buy are BEFORE a big tournament, not after you have heard the results. When a new set comes out, don't buy it. Instead, buy an older set that has probably gone down in value because people have moved their interest to the new, hot thing. If you want to hold a product for a long time, wait until it rotates out of Standard to purchase it at the lowest price.

Positioning Your Assets

To make money in anything, you need to be in the in the right place at the right time. So much depends on your choice to move in and out of a particular investment that I think it bears a more in-depth treatment.

Position - Your position in a product is how much you hold of it and why.

There are really only two positions you can take on an investment: Long and short.

Long - Taking a long position means that you are going to buy something and hold it while it increases in value. You take a long position because you think something is undervalued.

Short - Taking a short position means that you are selling something and converting that value to cash. You take a short position because you expect the price to decline soon.

If you aren't buying or selling a particular product, you simply don't have a position on it.

It is the advice of this author that if you want to make any money investing in Magic you must buy and hold for the long term. When you get in/out, the size of the spread, and market fluctuations will have an effect on your profits, but they are minimized when you take a long term approach. Don't forget that there is a market for more than just singles! Diversify your investment so that the popularity of particular cards or formats doesn't decrease the value of your investment.

This series has become quite the epic. Many apologies Zoners, but I have a lot to say and only so much time to say it. Join me next week for the epic conlcusion of my discussion of MTG Finance where I will discuss RISKS!!!

-GG

In General: MTG Economics Part 2: Secondary Markets

Hello and welcome to another In General, the Sunday segment where we can discuss anything and everything that relates to Magic the Gathering. I try to steer clear of the world of MtG finance, particularly in my writing. I deal with finance all day at work and I don't like to mix business and pleasure. But last week, I gave a discussion about why Magic sealed product don't experience a true market, particularly with regards to Magic Online.

This is part two of a four part saga about finance and Magic.
If you missed part one, check it out here: The Primary Market Price

In short, there is inside manipulation occurring that limits supply to artificially hold up prices. Obviously, this will have a significant impact on the value of your collection and your ability to increase that value over time. In this article, I will be explaining some of the problems with trying to use Magic as an investment in the Secondary Market, continuing my metaphor of using Magic cards as securities.

A Separation of Sellers and Buyers

First, let me explain what that means. A Primary Offering, is one that comes from the original issuer or producer, i.e. Wizards. Cards being sold from Wizards to stores are said to sold in the Primary market. A Secondary offering is one that happens between two parties who are not the original issuer. E.g. I sell a copy of Gifts Ungiven to Uncle Landdrops for a Snickers bar. You can see how this ends up creating an environment where there are issuers, brokers, and consumers, who all interact to create a market for the product.

If this sounds complex, don't adjust your TV screen, financial markets are so complex that they often become opaque. This makes it very difficult for the average consumer to make money buying and selling products in an open market. If you have ever known someone who has lost a lot of money speculating on the price of Magic cards you're about to learn why.

Factors that Limit Profits

Ask Price - This is the price that you have to pay if you want to buy a card from a dealer. The asking price is going to be as close to the real, current 'market price'.

Bid Price - This is the price that you would be given if you wanted to sell a card to a dealer. It will always be lower than the asking price because there is an expense to running a business and reselling the card. The bid price is closer to the real 'value' of a card than the ask price, but will usually be far below the 'market price'

The way to easily remember these two is this: You have to pay whatever the dealer ASKS, but when you sell, you will take whatever the highest BID is.

Spread - This is the difference between the ask and bid prices. This covers the dealer's expenses and profits and is often thought of as a sales charge. The spread can vary in size, but make no mistake, it is always a POSITIVE NUMBER. Businesses cannot reliably sustain transactions that don't make money.

The only way that you can really exchange a card for its real value is to trade it for another card that you value equally. The problem with this is that you are trading one SUBJECTIVELY VALUED, SPECULATIVE INVESTMENT for another one. Because of all the associated factors that are outside your control, it is going to be very difficult to amass any real economic gains over the long term.

Arbitrage - This is the act of buying something and then selling it in a different market to take advantage of a difference in pricing. These differences are a result of an inequality of information and only exist for a short time.

This is the holy grail of mercantilism: instant profit. The problem is that the prices are moving constantly and you might be the person who has the bad information, which creates a large risk.

So here is the squeeze. If you have to purchase the product at a premium and sell it at a discount, you are going to lose money unless the actual value of that product goes up dramatically. Sales charges cut directly into your gains. Also, some of the underlying appreciation of your card's value is being stolen away by successful arbitrage, which acts to quickly stabilize any movement in prices. Anyone who wants to really make some money buy investing in Magic has to take a broader approach and invest for the long term.

So there it is. This isn't an exhaustive list obviously, but I just want to give you a look at some of the problems that can stop you from making a profit trading Magic cards, even if it was heavy on theory.

That is all for this week. How are you enjoying the series so far? As always, your feedback is appreciated. Leave your thoughts in the comments below. I will see you next week for my discussion of how to successfully invest in MTG.

-GG

In General: MTG Economics Part 1: The Primary Price

Hello and welcome back to In General. On Sunday's here at TGZ we talk about anything and everything related to Magic the Gathering. Today, I am beginning a four-part opinion/educational piece on the economics of MtG, starting with everyone's favorite scapegoat: MtGO.

You can ask anyone in town, they will all have a few complaints about Magic Online. Specifically, I am going to pick out something that has been bothering me since the very beginning of online play: the cost structure.

Market Control

If you want to purchase a physical MtG sealed product, they are pretty expensive. There are certainly costs to creating and producing the game, but those are relatively small. Primarily, what drives up the cost of Magic cards is demand. While Wizards works to make the game appealing and grow the player base, the demand for cards is largely outside of the company's control. Some sets sell better than other. The reason for this is the strength of the product and people's interest in it.

Things are a little bit different when it comes to Magic Online. The costs of maintaining the program and providing support, etc., are still definitely there, so it could never be free, but there is no scarcity. A mint condition Black Lotus is expensive because only a handful still exist and thousands of people want one. Black Lotus is expensive on MTGO because Wizards has decided it will be that way.

By restricting the supply of new electronic cards 'produced' they keep the price of electronic boosters and other sealed product high, which they can then continue to sell for 99% PROFIT.

I fully endorse Wizard's right to run a profitable business and make money by entertaining people. That is their right as a corporation. But make no mistake, there is no real correlation between the price of an electronic booster pack and a physical one.

They don't require the same materials, don't trade in the same market, and don't suffer the same economic constraints, so why are they the same price? Actually, electronic boosters are usually more expensive from the Wizards online store than they are in real life. Tying these prices together is a convenient way for consumers to visualize and accept the costs, but in actuality this represents a clever price fixing scheme by Wizards.

Consumer Protection

When you provide a product to consumers, you should be required to disclose the extent to which you a Market Maker in that particular product and what your Compensation, if any, is for facilitating that transaction.

A market maker is any entity that has a way to control the supply, and thus the price, of a product. If you are a dealer with an inventory position, you are a market maker, provided you have at least a small percentage of the market under your control.

Compensation is pretty straightforward. I am not saying that every dealer needs to provide a full income statement and balance sheet with every candy bar they sell, but interested consumers should be given the opportunity to scrutinize such information at their request, if only in the interest of consumer protection.

Savvy readers may have picked up the language and rules that I am referencing. This is securities law. In the United States, nationally traded securities are regulated by the Securities Exchange Commission, which utilizes these rules for enforcing proper disclosure of material facts to consumers BEFORE THEY BUY.

Servicing vs. Profiteering

I am an adamant supporter of consumer protection. Not necessarily consumer protection LAWS, which are often politically motivated and have only modest effectiveness, but rather responsible business practices.

If a man was dying of thirst in the desert you would give him some water, right? Well, if you always did it for free, soon you would be out of water yourself because people would take advantage of your kindness, so you need to regulate the price somehow. You also don't want to charge extortionate prices because that will turn people away from you, shrink your market share, and most importantly: it won't serve your customer's needs.

I am arguing that, by pegging the price of online boosters to physical boosters AND artificially restricting the supply by only presenting limited public offerings, Wizards is behaving in an anti-consumer way. They are charging a fixed, theoretical maximum for a product which has a negligible marginal cost to produce. They hold a monopoly position, which is unavoidable because they created the game themselves and it is their intellectual property, but for those who are not inclined to an in-depth economic analysis, suffice to say that this situation usually ends poorly for the consumer.

Charging the highest prices that you can while optimizing sales is a typical indicator of a profiteering business model. A servicing business model is one in which you voluntarily charge lower prices to build up loyalty, trust, and social equity with your customers.

At the beginning I promised that this would be an opinion piece, so in case you don't think that you have gotten your money's worth, here is my final opinion on this subject: Companies, particularly someone like a toy manufacturer who brings so much joy into the world, should use a servicing model for pricing their products, NOT a profiteering model.

Join me next week Zoners, when I discuss why Magic isn't a great investment. Oh joy!

-GG